What's what in finances: Commodity

Any item which can be freely bought and sold. Examples include gold, food products and coffee beans.

Commodities are bulk goods and raw materials, such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa, that are used to produce consumer products. The term also describes financial products, such as currency or stock and bond indexes.

The quality of a given commodity may differ slightly, but it is essentially uniform across producers. The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer. A barrel of oil is basically the same product, regardless of the producer.

Commodities are bought and sold on the cash market, and they are traded on the futures exchanges in the form of futures contracts. They are generally traded in very large quantities.

You can buy options on many commodity futures contracts to participate in the market for less than it might cost you to buy the underlying futures contracts. You can also invest through commodity funds.

See also: What's what in finances: Asset

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